The following are examples of the application of reservation rules applying to policies.

Example 1

Eric effects a whole life policy for the benefit of his children. Premiums are payable annually and Eric pays those premiums direct to the insurance company.

Strictly speaking, possession and enjoyment of the property disposed of by way of gift (the cash) has not been assumed by the donee. However, this particular point is not one which should of itself be taken to constitute the gift as one with reservation.

Example 2

On 1 April 1998 John effects a whole life policy on his own life in trust. The trustees have a power of appointment over the trust fund which can be exercised in favour of John’s wife, Dolly but not John.

FA86/SCH20/para7 does not apply. The provision is only relevant if benefits can accrue to the donor or his spouse or civil partner (IHTM11032) under the policy itself. It does not apply in a situation such as this where the spouse or civil partner can only benefit under the trust even though the assets of the trust include a policy of insurance.

Example 3

Asha effects a straightforward life policy on her life upon trust for such of her children as survive her and attain the age of eighteen. If she should die childless then the policy will revert to her estate by way of resulting trust. She dies three years later.

FA86/SCH20/para7 does not apply. The benefits accruing to the children will vary according to their survival (and attaining the specified age) not by reference to any benefits which will or may accrue to Asha because of her residual interest.

Example 4

In 1980 Chris effected a whole life policy on the life of his wife, Emma for his own benefit. In 1982 he took out a loan with the insurance company which was secured on the policy. Interest on the loan was charged each year and added to the loan. In 1987 he executed a declaration of trust of the policy, charged with the loan, in favour of his son (absolutely) and died the following year.

FA86/SCH20/para 7 does not apply. The benefits accruing to the child do vary (because the amount receivable is dependent upon the amount of loan and interest outstanding) but they do not vary by reference to the benefits to the donor under the policy, but under the loan agreement.

However, the existence of the loan, and the fact that interest was added to it each year, impaired the son’s enjoyment of the gifted property and ‘trenched upon’ his rights therein. Accordingly the conditions of FA86/S102 (1)(b) are not satisfied and there is a Gift With Reservation (GWR) claim.

Example 5

An endowment policy is effected in trust for a named beneficiary, Charlie, if living on the death of the donor/life assured, Chris, before the termination date of the policy; otherwise the policy proceeds are held for Chris. The ‘termination date’ could include the maturity, the early maturity on guaranteed terms, or the surrender of the policy. It is likely that in such a case, Chris can decide when ‘termination’ should occur. If that is so , Chris is not entirely excluded from the gifted property (because he can terminate the policy and claim the proceeds) and the GWR provisions apply.

Example 6

A husband and wife, Cheryl and Simon, jointly settle an insurance policy on trusts under which there is an immediate interest in possession. The trustees have a power of appointment over the whole fund in favour of a number of persons including Cheryl and Simon but each settlor is specifically excluded from benefiting from the part which they settled.

The inclusion of each settlor’s spouse or civil partner (IHTM11032) as an object of the trust affecting the settlor’s share would not of itself make either gift a GWR.

Example 7

Katya effects a whole life policy in trust for the primary benefit of her children who have a defeasible interest in possession. The trustees, who include Katya, have a power of appointment over the settled property which can be exercised in favour of the members of a class of beneficiaries who do not include Katya.

The fact that Katya is a trustee is not in itself sufficient to bring the property within the GWR provisions.

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